Bees Knees

None of the utilities, repairs, or depreciation are allowed when the rental is below fair market value, even if rent exceeds expenses. Use of a dwelling unit by any individual who pays less than fair rental value is considered personal use by the owner, and therefore, no expenses attributable to that period of rental are deductible. Rental income must nevertheless be reported as income [iRC §280A(d)(2)]. Vacation home (mixed use) rules that allow deductions for utilities, repairs, and depreciation up to the amount of rental income only apply if there is some rental use. In Jackson, T.C. Memo. 199-226, the rent charged was determined to be below fair rental value the entire year. All expenses (with the exception of interest and taxes deductible on Schedule A) were disallowed because none of the use was considered rental use, even though the taxpayer had to pay tax on the rental income.

The imputed interest rules apply when the interest rate is less than the applicable federal rate (AFR). Thus, if interest is greater than AFR, there is no imputed interest. The purpose of the rule is to prevent taxpayers from using loans to shift income to taxpayers in lower brackets or to shift income from ordinary income to capital gains by raising a purchase price and charging less interest. For example, Kyle sells Ken property with a FMV of $50 million and an adjusted basis of $20 million. Assume Ken pays $5 million down and makes monthly payments of $500,000 to Kyle. If the sales price is $50 million and the interest rate is 8%, Kyle will realize a $30 million capital gain and earn approximately $24 million in taxable interest income. If the sales price is $60 million and the interest rate is 4%, Kyle will realize a $40 million capital gain and earn approximately $14 million in taxable interest income. Under both methods, Ken pays approximately $74 million in total principal and interest to purchase the property. However, by raising the purchase price and charging less interest, Kyle has shifted $10 million from ordinary income to capital gain income. Obviously, then, the IRS does not care if the interest is higher than the AFR because in that case, income subject to ordinary income tax rates increases and income subject to capital gain rates decreases. As to whether or not we should advise clients about the current AFR and the imputed interest rules, I believe that is a legitimate function of a tax professional. As to fluctuations in the AFR, the AFR that applies is the rate that applied at the time the loan was made. Future AFR that go up or down after the loan is made are irrelevant.

Where in my post did I say it is OK for someone with an ITIN to understate their deductions?

It is illegal to under claim deductions. From TheTaxBook, page 5-23: The reason it is illegal to under claim deductions is you are committing Social Security fraud. Social Security benefits are based on the average 35 years of Social Security earnings. The higher the earnings, the higher the benefit. By understating your deductions, you are overstating Social Security earnings, which is fraud. You as the preparer would also be subject to penalties if you went along with the fraud.

I look at the last year Schedule B entries to compare with current year 1099s to see if any are missing.

You mean ATX won't let you enter gross income on a Schedule C without first putting it on a 1099? What if you have income for the Schedule C that wasn't reported on a 1099?

Just curious, but why waste time entering 1099-MISC data into a 1099 input worksheet? Why not just enter the income directly on the Schedule C, or F, or wherever else it goes? E-file does not require the 1099-MISC details. Only W-2 and 1099-R details are required for e-filing.

And under John's line of reasoning, he did ACTUALLY pay it in 2010. Again, I'm not saying I necessarily agree. But since we are on a message board that likes to stretch the limits and go where no tax problem has ever gone before, John's argument deserves respect.

John makes a good argument. I'm not sure it would fly in court, but it does have merit. Unless you don’t believe there is a great deal of ambiguity in the tax code, and it is very worthwhile to explore offbeat positions as the legal climate changes.

An unincorporated organization with two or more members is a partnership by default for federal tax purposes if its members carry on a trade, business, or financial operation and divide profits. If there is no trade, business, or financial operation activity in this LLC, then it isn’t a partnership. The fact that they applied for an EIN tells IRS they should be filing a partnership return (assuming they did not elect to be taxed as a corporation). However, Revenue Procedure 84-35 says: My opinion is no need to file a 1065 since it really isn’t a partnership. If IRS does send a letter asking for a 1065, simply respond saying there is no business or financial operation, and Rev. Proc. 84-35 says there is no penalty. The other alternative if you want to play it safe is fill out a 1065 with all zeros and send it in each year. Charge the client for being dumb.

It is still a decedent’s estate until all estate assets have been distributed to the heirs. If the heirs all have an equal share of the remaining estate assets, one thing that could be done is have the estate distribute the property to the heirs by transferring title into their names. That allows you to close the estate. The heirs now own the property as joint tenants with right of survivorship. Since it is investment property and not a trade or business, the heirs don’t even have to file a partnership tax return for the rental activity. Simply split up income and expenses between each heir and have each report his/her share of the rental activity on their personal returns. Once the property is sold, each pays tax on his/her share of the gain.

TheTaxBook, page 1-14 says: Then, on 1/10/2011, TheTaxBook issued an update to that page crossing out the last two sentences that quote IRS Pub 535. The update reads: Interesting the 2009 IRS instructions said Medicare Part B premiums cannot be used to figure the deduction. Then they changed those instructions for 2010 saying they can be used. Nobody knows what the IRS will say in 2011.

Tax on a conversion is determined by using the fair market value of the IRA at the time it is converted to a Roth. If the value decreases after the date of conversion, the taxpayer is paying tax on an amount greater than the current value of the IRA. Thus, by extending the due date, the taxpayer has the option to recharacterize the Roth IRA back to a traditional IRA and null and void the tax due on the over inflated value of the IRA. Example: Taxpayer converts a traditional IRA to a Roth on 10/1/2010. As of that date, the value of the IRA was $10,000. Taxpayer files for an extension on his 2010 tax return. $5,000 of the conversion will be taxed on the 2011 return, and $5,000 will be taxed on the 2012 return under the special rule for 2010 conversions. On 5/15/2011, the value of the Roth IRA decreases to $2,000. The taxpayer no longer wants to pay tax on $5,000 on the 2011 return. Since the 2010 return was extended, the taxpayer has the option to recharacterize the Roth IRA as a traditional IRA as of 10/1/2010. In other words, it is treated as if the taxpayer never did a Roth conversion on 10/1/2010 and the taxpayer no longer has to add $5,000 of income to the 2011 return. After the recharacterization on 5/15/2011, the taxpayer now has the option to reconvert the traditional IRA to a Roth IRA using $2,000 as the taxable conversion amount rather than $10,000.

Some annuities guarantee principal, so there is no possibility of sustaining a loss. For nonqualified annuities (those that are not part of a qualified retirement plan) that do not guarantee principal, a loss is deductible as an ordinary loss only if the annuity is a refund annuity (Rev. Rul. 61-201). The unrecovered basis in a nonrefundable annuity is not deductible (Rev. Rul. 72-193). A loss on a nonqualified refund annuity is deductible in the same manner as losses sustained on lump-sum distributions from qualified retirement plans. Thus, if a lump-sum distribution representing the total amount in a refundable annuity is less than the unrecovered cost basis in the annuity, the difference is deductible as a miscellaneous itemized deduction subject to the 2% AGI limitation.

I disagree. Page 7 of Rev. Rul. 2009-13 says: The Rev. Rul. explained that a life insurance contract is made up of two parts: 1) an investment, 2) the cost of life insurance itself. If the premiums are greater than the cash value of the life insurance contract, the difference is considered the cost of the insurance itself. The cost of life insurance is non-deductible. Thus, there can be no deductible loss on an insurance contract. If this were an annuity contract, that would be a different story.